National Australia Bank Limited

Before answering this question, it is essential to recall the case that leads to the litigation by Narni Pty Ltd. The appellant's business was a nursing home set up in 1987 and all of the business premises were financed by borrowings from direct loans or indirect responsibilities to its shareholders. The pricipal shareholders and directors were registered nurses, Narni McCarthy and her sister Norma Caringal. Due to the cash flow problems, Mrs McCarthy frequently contacted with Clem Kealy, the manager of the Elwood branch of the Bank for an overdraft. However, the manager allegedly said she should wait and see how things developed.

No overdraft facility was approved till June 1988. The day to day income of the nursing home was solely funded by income received from the Federal Department of Health and Community Services (DCS). These contributions account for 80% of the nursing home budget and were received at the beginning of each month with a final payment about two weeks later. Immediately after the receipt of the funds from DCS, the account was then in credit with the bank. However, after the most substantial outgoings were taken out, the bank account dwindled to nil at the month's end.

It is indication that the account was inevitably overdrawn. Despite the fact that Mrs McCarthy had required the bank manager to provide an overdraft, no formal overdraft facility was put in place. The manager guaranteed payments to the company when cheques presented and that there was no need for a formal writing. In November 1988, formal approval for an overdraft facility of $65,000 was given but after that point the account was frequently in dire debit which was in excess of the approved limit. By the end of May 1989, the account was in debit for $174,568.

Shortly thereafter the bank started to dishonour the cheques. The consequence was that debenture securities were called upon and the physical assets were claimed by the mortgagee. The liquidation of business took place in 17 August 1989. The dishonour of wage cheques caused upset among the payees. The argument used by Narni was that the Bank had agreed to provide an overdraft facility upon a current account to support its business. The company went further in arguing that "the action of the wrongfully dishonouring cheques precipitated a failure of the business and its sale on behalf of a debenture holder.

The appellant (Narni Pty Ltd) was then placed in liquidation and remained subject to a deed of company arrangement" (para 2 per Tadgell JA). For that reason, Narni sued the Bank to seek for compensable loss resulting from the breach. 2. Question 2: breach of the implied term by the National Australia Bank The Bank's action of dishonouring cheques drawn by Narni gives rise to the fact of whether the Bank breached the contract entered into with its customer. The court found that the Bank had breached an implied term of the arrangement it had with Narni with respect to the overdraft facility.

That is the term of the contractual relationship between the Bank and its customer that "the Bank will not cease to do business with the customer except upon reasonable notice" as was described by Atkins J. in Joachimson v Swiss Bank Corp [1921] 3 KB 110 per Lord Atkin at 127. This term arises when the borrower consistently is permitted by the Bank to draw cheques on an overdraft account and those cheques are honoured in excess of overdraft limit. The conduct of the Bank relied upon as giving rise to the overdraft extension.

Officially, the approved overdraft facility was $65,000 and no more. In fact, the account was used to finance the operation of the Carrum Nursing Home was overdrawn deeply in excess of the approved limit. These facts were clear to both parties and it is apparent that both parties permitted this state of affairs to exist. The court accepted that the arrangement between the Bank and the company did not oblige the Bank to honour cheques if there were not sufficient funds in the company's account: Cuthbert v.

Robarts Lubbock & Co [1909] 2 Ch 226 at 233 per Cozens Hardy, MR. However, the court decided that the conduct of the Bank was sufficient to constitute an arrangement between the Bank and the company that the Bank would permit the company to overdraw beyond the limit of $65,000. The court went further in stating that "the Bank received good value for the extra accommodation having received interest and other fees and the retention of a satisfied customer" (Byrne, J. ).

The conduct of the Bank by honouring cheques at a time when the account was well in excess of $100,000 impliedly extended the overdraft facility to "a limit of at least $100,00" and further agreed not to dishonour a cheque drawn "within the limit" without first giving adequate notice: para 26C, 26D. According to the manager's diary, he contacted Mrs McCarthy and required to constraint the Narni account within the approved limits on 4 January 1989, 27 January 1989, 1 February 1989 and 31 March 1989.

However, the account remained substantially over the approved limit until the May cycle commenced and at the end of the May cycle, the account was $100,000 over this limit. It is noticed that there was no evidence of any specific warning of dishonour after that recorded by the manager on 31 March. Therefore, it was concluded that the Bank continued to permit the company to overdraw the cheques till the date of termination without any warning in writing.

The practice of the Bank in 1989 shows that the silence by the Bank meant the cheques were being honoured and this action would be reflected in the periodic bank statements by debiting the overdraft service fees and applicable interests where the account was overdrawn. Moreover, in the document signed by the director of Narni on 6 November 1987 when the account was opened with the Bank, there was the term of the contract that in case of termination, the Bank would give immediate notice in writing.

As a matter of law, it was an implied term of the arrangement that the Bank could not terminate or vary it without giving the customer reasonable notice so as to allow time for it to arrange its affairs to comply. In addition, any cheques which had been previously drawn and delivered need to be honoured under the pre-existing arrangement in place at the time they were drawn and delivered. In fact, the conduct of the Bank showed no evidence of written warning so as to make the real threat to Narni. The term "reasonable notice" was neglectful in this case.